Students use a variety of mechanisms to finance a four-year college education. Depending on eligibility, families pay for college using grants, work-study, family earned income, family savings and student loans. In recent years, state and federal grant aid has remained relatively flat while tuition continues to rise. With grant aid losing its purchasing power, families are using other sources to fill the gap. This has led to a rapid increase in borrowing and cumulative debt of graduates.

The most recent data shows that 71% of 2010 college graduates of four-year colleges in Minnesota graduated from school with federal and private loan debt, compared to 69% in 2001. For those who borrowed, the average debt was $28,755 — up from $15,311 for 2001 graduates. As shown in the table below, the average cumulative debt for 2010 graduates ranged by sector from $27,354 to $31,133.

According to finance experts at NorthStar Total Higher Education Loan Programs, a St. Paul-based nonprofit student loan organization, manageable payback of education loans should be 8% or less of gross monthly income. If a student graduates with the state's average of nearly $30,000 in cumulative debt and wants to repay the loan within 10 years, that student would have to earn $55,000 per year or more. Recent research suggests that the average earnings for recent bachelor's degree recipients are closer to $40,000 (Michigan State University's Collegiate Employment Research Institute report Recruiting Trends 2009-2010).

Who borrows and how much?
Students who borrow to pay for school come from all income levels. The most recent data available to analyze borrowing characteristics is from the 2007-08 graduating class (see table below). While it might be counterintuitive, at each debt level except the $10,000 to $19,000 range, the higher share of borrowers are from middle- or high-income groups. For example, of those who graduated with $20,000 to $29,000 in cumulative debt, 68.8% came from families earning $50,000 to $99,999.

While the table above indicates higher proportions of students who borrow are from middle- or upper-income families, the table below shows that higher cumulative debt occurs in higher-income families.

Implications and policy considerations
Minnesota's average cumulative debt for graduating seniors ranks fourth compared to other states. However, it compares well nationally in the rate at which students default on their student loans. The national default rate is 7% compared to Minnesota's 3.7%. For more information, see Federal Financial Aid & Loan Default Rates.

While student borrowing is increasing, it does make higher education possible for many students. In so doing, this borrowing can be a good investment, one that provides a lifetime of economic gains. For example, students with bachelor's degrees earn on average 74% more than those who only earn a high school degree. And as current data suggest, Minnesota's high cumulative debt is not yet leading to increased default rates.

Yet increased borrowing by students has some troubling elements — especially when government grant aid has essentially remained stable or has decreased on a per-student basis (for more information, see the "Minnesota Educational Needs and Higher Education Finance Policy" research brief). Debt is most troubling when it discourages enrollment, prevents students from choosing the institution that would be the best fit for them, and makes it harder for students to complete their degrees. So with limited public resources, policy makers who are concerned about student debt should focus their attention on students with the greatest financial need and the impact of that debt on their futures.